The newly-nationalised RBS confessed this morning that it had a £400m exposure to the funds managed by Bernard Madoff, the Wall Street trader who was arrested last week when it emerged his $17bn hedge fund was actually a giant pyramid scheme to defraud investors. Madoff has apparently managed to rack up losses of $50bn in recent years, which is going to leave some of the world’s biggest financial institutions substantially out of pocket – HSBC, BNP Paribas, Abbey owner Santander and hedge fund manager Man Group also had big commitments to the alleged fraudster’s funds.
In a statement, RBS said its £400m of exposure was via ‘trading and collateralised lending to funds of hedge funds’ invested in Madoff’s business – not exactly ideal when you’ve just been forced to tap your own Government for £20bn in emergency funding. Man Group also said today that it had $360m of exposure, while BNP Paribas is in hock to the tune of €350m, HSBC has exposure of $1bn, and Spanish banking giant Santander stands to lose a whopping €2.3bn. City superwoman Nicola Horlick’s fund-of-funds could see 10% of its assets go up in smoke, while the Times reports that Vincent Tchenguiz’s rotten year is about to get even worse with a £40m loss. Madoff clearly had some great patter…
It’s an extraordinary story: Madoff, a former chairman of Nasdaq, has been one of the best-respected stock pickers on Wall Street for years, providing investors with market-beating returns thanks (supposedly) to well-timed bets on US equities. However, it turns out he was in fact perpetrating one of the oldest scams in the book: a pyramid scheme in which earlier investors were paid with new investors’ money. As a result, he’s apparently managed to mislay an extraordinary $50bn of his investors’ money – quite a feat given that he theoretically had just $17bn under management…
By all accounts Madoff’s business has been insolvent for years, but he was obviously able to get away with it as long as asset prices kept rising and money kept flowing into the hedge fund industry. But now that inflow has dried up (in fact lots of investors are trying to get their money out) that clearly wasn’t going to work any more. He apparently confessed all to his sons last week, who proved blood may not be thicker than water after all by promptly shopping him to the authorities.
The fallout is likely to be long and bloody. A class-action lawsuit is inevitable, while reports suggest some investors may sue the advisers who put their money with Madoff. The highest-profile casualty should be the US SEC, the regulator which has repeatedly given Madoff the all-clear (a fairly glaring oversight, as it turns out). But it’s also likely to further undermine confidence in the world hedge fund industry – after all, if the regulator can’t spot a $50bn fraud, would you trust them with your money?
In today's bulletin:
Fraudster Madoff with RBS money too
Barclays' John Varley expects 30% house price crash
West Coast Main Line railway starts with a bang
The spirit of Christmas bribery
Should retailers take a New Look at stock control?